Just curious to ask about about what you guys think about the placement of entries, which naturally also leads to where stops are placed. The way that I have first been introduced to trading is to enter in an area where price is showing strength in a certain direction (ie. price has already shown where it wants to go). This idea is nice because you would think that when placing a trade, you'd like to first see that it will in fact go in this direction. But since they say the market teaches you to do whatever will lose the most money, I wonder if there is perhaps a better way to look at this.
Follow my thought experiment please. Below is a 5 sec chart, which I know some people think cannot be traded, but this same rationale would apply to a 1 min chart so this doesn't much matter. What I'm after here is discussing the rationale involved in making a decision about where to enter.
So in this first chart, reading from the left, we have price in a clear up trend, but we already have that line of resistance marked so we are watching intently. Sure enough, price does take a bit of a breather and goes sideways. We can draw a support line at the swing low that forms, and track this going forward. At "A", we might even notice price drops below this swing low, but whatever contracts are available are bought up.
So it seems that since we aren't quite sure what will happen now, its best to wait for price to show us. We see price shoot up above resistance at "C", come back down to just below resistance, and we figure that its safe to enter a stop limit order to go long above this test of R then S if price should happen to come back up. If we are filled, then this gives us pretty good confirmation that price really wants to go up. If we want even more confirmation, we could wait for price to break that little high at "C", which it does, but only by a tick of course.
Now we see what happens next. We are filled, but price drops, goes through resistance, and almost makes it to the bottom of that possible support line. Keep in mind that depending on exactly where we are filled, we are now 3 points in the red, and unless we want to use a wide stop, perhaps we would have already exited.
Now this is just one example where this perhaps didn't work too well if we used tight stops, and perhaps given a series of 20 trades, waiting for a breakout, waiting for the retrace, and then going long above the retrace/test of the level is still a good strategy. But I wonder if there is a better way.
Here is what got me thinking. Ultimately, we never know what will happen next. Once we see price moving in a direction, it makes sense that it will continue to do so, but often, the more confirmation you have that a trend is under way, the wider the stop you have to use to account for this confirmation.
So I'd like to turn this idea upside down, the idea that I need confirmation of a direction before entering a trade. Why don't I, instead of waiting for confirmation for price to show me where its going, enter at an area that doesn't confirm a direction, but in an area that if using a tight stop that is triggered, like a 2 point stop, will more than likely tell me that the direction is actually wrong. (ie. don't wait for price to show me its going up, enter long in an area where it better damn well go up from here, or else up really isn't in the cards)
Let me explain via this same chart. So we have price approaching R as before. I could blindly just put in an order to sell right at the resistance line, such as at "D", which gets me a really good price for a short, but I am perhaps just throwing the dice here. (I still have yet to figure out mind you if this isn't so bad of a strategy given that any type of confirmation will almost always lead to a worse price, and since we are in this to make money, a better price might in fact be more important than confirmation)
So after D, lets say I haven't done anything yet. Am I thinking that price is now going up? Or am I thinking price is going down?
When we hit "E", I'm thinking "shit, I missed out on that short because look, price is already 2 points lower." Shorting now might give me an ounce of confirmation that price is in fact going down, since its already lower, but trust me, I've tried this, and the market has taught me how to lose the most money.
So price now comes up to "F" (good thing I didn't short at E). Now what do I think? Well, we tried to go lower, but found lots of buyers, hence why price came up. We haven't yet breached the high at D, so we have no confirmation of price going higher. That swing low at E is technically a higher low, and the direction is up, but if we wait for confirmation, we get what he had in the first example, where we got in at a top, above the breakout.
If I'm looking for a short, and if I wait to short by waiting to see price drop below that swing low at E, this does get accomplished at G, but once again, this doesn't go anywhere (there is of course no retracement entry here, but nevertheless, price does make a lower low by 2 ticks... perhaps some long entries were stopped out if they put their stop at 1 tick below that swing low at E).
So where am I going with all this? Its just essentially this. If I'm looking for a short, my best place isn't where price is showing its going down, like at "G" where we can make the case that price bounced off a few times from resistance and made a lower low. Its actually at the level that tells me if price goes above here, your short is in trouble. This level is that resistance line, so either at D or F. If price goes up just 2 points, that short is seriously in trouble. If I wait to short at G and price goes up 2 points, its still below that resistance line and hence the short hasn't been invalidated, but I'm already in the red by a few points.
Conversely, if I'm looking for a long, it isn't at "B" from the earlier chart where I can feel good about having confirmation that price broke above the resistance level and also broke above the little trading range. The best long is actually at that level of the swing low at "E". (not at E, since I don't know that price will stop there, but at the next time price comes down so around G). The idea of course is that if I take a long at G, and I get stopped out, then I can be way more sure that price is in fact probably not going up. If I take a long at B, price might retest that range, retest the midpoint of the range (which is what it did actually), retest the lower level of the range, and none of this might invalidate the long trade just yet, but it certainly means I gotta use a wide stop.
So instead of looking for a trade where I think price is showing me where its going, why don't I take a trade at a level that says if this level breaks, the trade looks very dicey. The rationale behind this is that if I take away the need to be right, hence require confirmation from the market, but instead focus on making money, then it makes more sense to enter in a place where the trade can be invalidated very quickly for little money loss.
Here is how it ends. Price does in fact go higher. But if I took a short at F, I could be out BE, and if I took a long at G, I'm already in and don't have to worry about my entry at B, which was above that resistance line and would have more than likely been a loss of a few points.
Any comments?
Follow my thought experiment please. Below is a 5 sec chart, which I know some people think cannot be traded, but this same rationale would apply to a 1 min chart so this doesn't much matter. What I'm after here is discussing the rationale involved in making a decision about where to enter.
So in this first chart, reading from the left, we have price in a clear up trend, but we already have that line of resistance marked so we are watching intently. Sure enough, price does take a bit of a breather and goes sideways. We can draw a support line at the swing low that forms, and track this going forward. At "A", we might even notice price drops below this swing low, but whatever contracts are available are bought up.
So it seems that since we aren't quite sure what will happen now, its best to wait for price to show us. We see price shoot up above resistance at "C", come back down to just below resistance, and we figure that its safe to enter a stop limit order to go long above this test of R then S if price should happen to come back up. If we are filled, then this gives us pretty good confirmation that price really wants to go up. If we want even more confirmation, we could wait for price to break that little high at "C", which it does, but only by a tick of course.
Now we see what happens next. We are filled, but price drops, goes through resistance, and almost makes it to the bottom of that possible support line. Keep in mind that depending on exactly where we are filled, we are now 3 points in the red, and unless we want to use a wide stop, perhaps we would have already exited.
Now this is just one example where this perhaps didn't work too well if we used tight stops, and perhaps given a series of 20 trades, waiting for a breakout, waiting for the retrace, and then going long above the retrace/test of the level is still a good strategy. But I wonder if there is a better way.
Here is what got me thinking. Ultimately, we never know what will happen next. Once we see price moving in a direction, it makes sense that it will continue to do so, but often, the more confirmation you have that a trend is under way, the wider the stop you have to use to account for this confirmation.
So I'd like to turn this idea upside down, the idea that I need confirmation of a direction before entering a trade. Why don't I, instead of waiting for confirmation for price to show me where its going, enter at an area that doesn't confirm a direction, but in an area that if using a tight stop that is triggered, like a 2 point stop, will more than likely tell me that the direction is actually wrong. (ie. don't wait for price to show me its going up, enter long in an area where it better damn well go up from here, or else up really isn't in the cards)
Let me explain via this same chart. So we have price approaching R as before. I could blindly just put in an order to sell right at the resistance line, such as at "D", which gets me a really good price for a short, but I am perhaps just throwing the dice here. (I still have yet to figure out mind you if this isn't so bad of a strategy given that any type of confirmation will almost always lead to a worse price, and since we are in this to make money, a better price might in fact be more important than confirmation)
So after D, lets say I haven't done anything yet. Am I thinking that price is now going up? Or am I thinking price is going down?
When we hit "E", I'm thinking "shit, I missed out on that short because look, price is already 2 points lower." Shorting now might give me an ounce of confirmation that price is in fact going down, since its already lower, but trust me, I've tried this, and the market has taught me how to lose the most money.
So price now comes up to "F" (good thing I didn't short at E). Now what do I think? Well, we tried to go lower, but found lots of buyers, hence why price came up. We haven't yet breached the high at D, so we have no confirmation of price going higher. That swing low at E is technically a higher low, and the direction is up, but if we wait for confirmation, we get what he had in the first example, where we got in at a top, above the breakout.
If I'm looking for a short, and if I wait to short by waiting to see price drop below that swing low at E, this does get accomplished at G, but once again, this doesn't go anywhere (there is of course no retracement entry here, but nevertheless, price does make a lower low by 2 ticks... perhaps some long entries were stopped out if they put their stop at 1 tick below that swing low at E).
So where am I going with all this? Its just essentially this. If I'm looking for a short, my best place isn't where price is showing its going down, like at "G" where we can make the case that price bounced off a few times from resistance and made a lower low. Its actually at the level that tells me if price goes above here, your short is in trouble. This level is that resistance line, so either at D or F. If price goes up just 2 points, that short is seriously in trouble. If I wait to short at G and price goes up 2 points, its still below that resistance line and hence the short hasn't been invalidated, but I'm already in the red by a few points.
Conversely, if I'm looking for a long, it isn't at "B" from the earlier chart where I can feel good about having confirmation that price broke above the resistance level and also broke above the little trading range. The best long is actually at that level of the swing low at "E". (not at E, since I don't know that price will stop there, but at the next time price comes down so around G). The idea of course is that if I take a long at G, and I get stopped out, then I can be way more sure that price is in fact probably not going up. If I take a long at B, price might retest that range, retest the midpoint of the range (which is what it did actually), retest the lower level of the range, and none of this might invalidate the long trade just yet, but it certainly means I gotta use a wide stop.
So instead of looking for a trade where I think price is showing me where its going, why don't I take a trade at a level that says if this level breaks, the trade looks very dicey. The rationale behind this is that if I take away the need to be right, hence require confirmation from the market, but instead focus on making money, then it makes more sense to enter in a place where the trade can be invalidated very quickly for little money loss.
Here is how it ends. Price does in fact go higher. But if I took a short at F, I could be out BE, and if I took a long at G, I'm already in and don't have to worry about my entry at B, which was above that resistance line and would have more than likely been a loss of a few points.
Any comments?
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